How to Leverage Value-Based Pricing for SaaS Growth

| Billing & Pricing

by Abigail Endsley

In the world of B2B SaaS (and all companies for that manner), growth is king. Just think about how much time you spend on your marketing and sales. The time spent pouring over leads, pipeline, conversions, win rates, and everything in between each and every month is staggering!

But despite this laser focus, there’s one growth area most businesses neglect: pricing.

And while “you obviously need to acquire customers,” says Profitwell’s Patrick Campbell, “your pricing growth lever is actually 7.5x more powerful for growth.” Let’s talk about how (and why you) should begin leveraging your pricing strategy for business growth. It all starts with value. (Specifically, value-based pricing.)

The Marriage of Value & Price

We live in an omnichannel world of communications. 20 years ago, the sales cycle consisted of 2 parties—the customer and the seller. Now, it consists of the whole world. The customer is more informed than ever. No longer can you simply present a pricing package and expect customers to take it at face value. The moment you charge $1,000 for something that is worth $100, your customer tweets, and the Twittersphere blows up with gut responses and freemium recommendations.

Suddenly you’re being evaluated by millions, and if your value doesn’t line up to the price you’re charging, you develop a reputation as a price gouger. (And that kind of reputation isn’t easy to shake. The internet has a long memory.) Millennials, who make up the bulk of the market at this time, are far more price conscious than generations before. To them, price gouging is toxic, and they vote with their feet, running to the companies with the highest perceived value and fleeing from those who don’t.

But these changes are nothing to be afraid of. In fact, they simply demonstrate a simple fundamental economic principle which will always remain true: assuming they have the means, people will pay for value. In other words, now more than ever, value-based pricing is the key to winning in B2B SaaS.

How to Implement Value-Based Pricing

Knowing that everyone should price based on value is easy, but how do you actually determine what your product or service is worth? Unfortunately, this isn’t so easy—value-based pricing isn’t tied to one specific pricing model or process, it’s entirely unique to your business.

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However, you can begin building your unique value-based pricing strategy by answering three big questions:

1. Who is your market?

Your goal as a SaaS leader is to solve the needs of your customers. You already know who they are and why they need your product or service. This same information not only determines how much your solution is worth to your target customer, it also reveals how they want to pay for it.

Start by asking:

  • Who is your customer and what are you selling them?
  • How does your solution affect their work or life? How much time or hassle does it save them? How does it enable them to make their lives or businesses better? How much is it costing them to not use your product or service?
  • What (and how) would your target customer expect to pay for your services? What other products do they currently value, and how much are those products worth to them?

The best example of a company who won through deeply understanding their market is Amazon Web Services. Back in 2006, they made an unprecedented change to their pricing model: switching from the standard “pay for what you deploy” to the radical events-based billing approach, “pay for what you use.” To any other company, this pricing model was suicide. Wouldn’t the unpredictability of events-based billing put them at a disadvantage when it came to raising money and moving to an IPO?

Low and behold, no, it didn’t! Instead, this model perfectly aligned with AWS’s target customer—developers, who aren’t keen on paying a cent more than they need for services—which caused the business to grow to a $35B business over the next decade, transforming them into an industry leader in SaaS.

2. Who are your competitors?

While we don’t recommend choosing your pricing strategy based solely on what your competitors offer, we do encourage you to take time to understand them and their pricing strategies. After all, how can you remain competitive without properly identifying who you’re competing against and how you stand out from the crowd?

Start by asking:

  • How is your product similar to those also in the market? What sets you apart? What is that worth to your customer?
  • Which competitor offers a product most similar to yours (aka who is your #1 competitor)? How are they pricing? Is your price competitive in the space?
  • What pricing models do your competitors subscribe to? How entrenched is that model in the market? Is it expected? Is it the best way to serve your customers?

Take Quibi, for instance. This was a video streaming platform who identified their #1 competitor as Netflix. In this context, they were priced competitively—$5 a month vs. Netflix’s $14. So why did Quibi lose? Because Netflix wasn’t their competitor.

Quibi was a video streaming platform designed for mobile consumption. It offered short custom content designed to be watched in quick bursts. Their product wasn’t competing against Netflix, who lead the market in long-form, bingeable material. It was actually competing with Youtube and Tik Tok, which, compared to their low-low price of “absolutely free,” suddenly made Quibi infinitely more expensive than the market leaders, causing it to fall like a shooting star.

The moral of the story? If you don’t have an accurate understanding of where you fit in the marketplace, you’ll be blind to obvious pricing errors which will tank your business.

3. How can you demonstrate value?

A groundbreaking pricing strategy will mean nothing if your customers don’t understand the value you provide. It’s up to you to show them. Companies employ a variety of tactics to educate their customers on product value, from freemium offers to free trials to simple marketing and messaging. Which tactic is best for your business?

Start by asking:

  • What’s standing in the way of my customer understanding the value my product or service provides?
  • What are the best tools for educating my particular market on value: do they need to be shown? Maybe they’d rather use your product themselves?
  • How can you hybridize your pricing model to better appeal to consumer’s expectations while educating them on the benefits of your strategy?

One company who demonstrates value better than almost any other is Slack. Slack uses a variety of tactics to help teams understand the value their software has to offer, from the clear messaging of their tagline, “where work happens,” to an interactive demonstration right on their home page, to their choice to deliver a light version of their software entirely for free, it’s not difficult to imagine the value this powerful product could offer your team.

However, most teams will need more than the free version of Slack. Upgrading comes with a host of useful features, but isn’t required to understand the unique value this software offers. This approach to demonstrating value works perfectly for Slack because they know their market: not businesses, but the people who make them run. This $400M industry titan knows that their customers aren’t interested in sitting through a sales pitch. But they are interested in trying out new solutions to solve their team’s communication issues. Stat.

To win with value-based pricing, stay flexible and be fearless.

One thing is certain, in B2B SaaS, nothing stays still for long. Users may switch loyalties at the slightest dissatisfaction or inconvenience. The businesses who win in SaaS are the ones who embrace change. This means a focus on innovation. It means striving to reach larger audiences, grow your staff, and generally increase your value to customers. And, yes, it also means regularly updating your pricing.

In fact, according to Profitwell, the companies with the greatest pricing power are the ones who re-evaluate their pricing strategy every three months and make changes every six.

No matter how well you understand your customer and competitors, or how much thought and effort you put into demonstrating value, it’s unlikely you’ll get your value-based pricing strategy exactly right the first time. But let’s say you did. That still doesn’t mean the strategy that wins today will continue to win tomorrow, or in five years. The world moves too fast for that.

So, when it comes to employing value-based pricing for your business, the most important thing to remember is to stay flexible. The biggest mistake you can make in pricing is fall into “set it and forget it” mentality. The second biggest is to not even try.

It’s not all on you.

Of course, pricing courageously doesn’t mean pricing blindly or implementing changes by yourself. You have a billing partner ready and willing to help you take on this endeavor.
Chargify is the leading partner in B2B SaaS billing. We come with over a decade of experience helping SaaS businesses leverage their billing as a growth lever. Our billing experts work alongside you to craft the billing and pricing strategy that your business needs to win, and our software offers all the features and capabilities you need to see it through. Click here to learn more about Chargify, and how we can help you take your business to the next level.

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